Author Question: What is the last dollar rule for cost-minimization? Provide a brief explanation (in words) as well ... (Read 102 times)

newbem

  • Hero Member
  • *****
  • Posts: 579
What is the last dollar rule for cost-minimization? Provide a brief explanation (in words) as well as the corresponding mathematical equality.
 
  If the firm is producing at a point where the isocost line is steeper than the isoquant, what does the last dollar rule imply (i.e., where is the last dollar most productive, L or K) and how should the firm alter its capital and labor in the long run?

Question 2

The above figure shows the demand and supply curves in the market for milk. If the government imposes a quota at 500 gallons, calculate the deadweight loss.
 
  What will be an ideal response?


fromAlphatoOmega22

  • Sr. Member
  • ****
  • Posts: 345
Answer to Question 1

The last dollar a firm spends on capital should have the same impact on output as the last dollar a firm spends on labor in order to be minimizing costs:
MPL/w = MPK/r
If the isocost is steeper than the isoquant, then
MRTS < w/r
This implies MPL/w < MPK/r, in which case the last dollar is more productive when employing capital. The firm should increase the amount of capital and decrease the amount of labor in order to minimize its costs.

Answer to Question 2

DWL = .5(4  2 )(1000  500 ) = 500



Related Topics

Need homework help now?

Ask unlimited questions for free

Ask a Question
 

Did you know?

The first monoclonal antibodies were made exclusively from mouse cells. Some are now fully human, which means they are likely to be safer and may be more effective than older monoclonal antibodies.

Did you know?

Nitroglycerin is used to alleviate various heart-related conditions, and it is also the chief component of dynamite (but mixed in a solid clay base to stabilize it).

Did you know?

Less than one of every three adults with high LDL cholesterol has the condition under control. Only 48.1% with the condition are being treated for it.

Did you know?

The FDA recognizes 118 routes of administration.

Did you know?

The Food and Drug Administration has approved Risperdal, an adult antipsychotic drug, for the symptomatic treatment of irritability in children and adolescents with autism. The approval is the first for the use of a drug to treat behaviors associated with autism in children. These behaviors are included under the general heading of irritability and include aggression, deliberate self-injury, and temper tantrums.

For a complete list of videos, visit our video library